Can You Borrow Against a Roth IRA Before Retirement?

by Chris Joseph

Contributing to a Roth IRA can be an excellent way to accumulate funds for retirement. However, situations can arise where you may need money prior to reaching your retirement years. One option is to make a short-term withdrawal of the funds that have accumulated in your Roth over time. This should be done with caution, as penalties apply if the transaction is not conducted properly.


With a Roth IRA, you are able to make annual contributions up to the allowable limit, which as of 2011 is $5,000 if you're under age 50 and $6,000 if you're 50 or older. Unlike a traditional IRA, contributing to a Roth will not lower your taxable income for the tax years in which you contribute. However, when you reach age 59 1/2, you can begin to receive qualified distributions, meaning you can withdraw the money on a tax-free basis.

Borrowing Money

While you technically cannot "borrow" money from a Roth in the form of a loan like you can from a 401k, you can withdraw and subsequently replace funds prior to reaching age 59 1/2. However, certain restrictions apply to the transaction. The money must be replaced in the account or rolled into another Roth IRA within 60 days of the withdrawal. You are also limited to one transaction of this type within a 12-month period. Unlike a loan, you do not need to pay interest on the amount you withdraw.


It is important that you replace the money you borrow within the 60-day window. If you fail to do so and you are under the age of 59 1/2, you may owe a 10 percent penalty and taxes on any earnings you withdraw. The same rules apply if you make more than one withdrawal within a 12-month period; even if you replace these funds within the 60-day window, you will incur the penalty and tax for the second and subsequent transactions.


As an alternative to borrowing money from your Roth, you can consider taking a straight withdrawal. The IRS allows you to withdraw the full amount of your Roth contributions at any time without taxation or penalties. You can only withdraw the earnings without penalty after you've reached the age of 59 1/2 and if the account has been funded for at least five years, unless you qualify for certain exceptions. For example, if you have a disability or are purchasing a first home, you may be able to withdraw the earnings earlier without penalty.

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